German industrial company Siemens AG on Tuesday agreed to merge its rail operations with French train-maker Alstom SA, aiming to create a European giant with the scale to fight growing competitive threats from state-backed Chinese rivals.

Shares in Alstom opened more than 8% higher Wednesday, while those in Siemens were up 1%.

Continue Reading Below

Under the deal, Siemens will have majority control of the new company, receiving slightly more than 50% of its shares, officials from Alstom and Siemens said. Alstom shareholders will receive two special dividends totaling EUR1.8 billion ($2.13 billion): EUR4 a share for surrendering control of the company and EUR4 a share as an "extraordinary dividend," the companies said.

The proposed merger marks a major test of Europe's ability to overcome national economic rivalries and establish a European champion, akin to Airbus SE in aviation. The deal faces the risk of political backlash in France, where Alstom's factories have been a symbol of national industry for more than a century.

Yet the merger has strong backing from French President Emmanuel Macron, who has argued that Europe needs to cooperate across borders to compete better against economic powers in China, the U.S. and elsewhere. The deal echoes the political overtures Mr. Macron is making to German Chancellor Angela Merkel to bolster the eurozone economy by establishing a shared budget for the currency bloc.

"We put the European idea to work and together with our friends at Alstom, we are creating a new European champion in the rail industry for the long term," said Siemens Chief Executive Joe Kaeser.

"This is a large deal, so it's no surprise that it will be looked at closely by the European Commission. We are confident," he said on a call with analysts.

The deal would dilute French control over Alstom, which shrank dramatically in 2015 when the company sold its electric turbine division to U.S. industrial conglomerate General Electric Co.

That deal handed a key piece of France's nuclear power business to GE, outraging members of France's Socialist government at the time. The labor minister called it a "breach of national ethics."

To ease French concerns, the current chief executive of Alstom, Mr. Poupart-Lafarge, will lead the new business. Its headquarters will remain in France, as will its research-and-development centers. Siemens will be prohibited from owning more than 50.5% of the new company for four years, but after that can boost its stake as much as it likes. A combination would create a European transportation business with about $18 billion in annual sales. Alstom had sales of EUR7.3 billion in the financial year ended March 31. Siemens's mobility unit had EUR7.8 billion in revenue last year.

Tuesday's deal is intended to help Europe's rail industry confront an increasingly serious threat: CRRC Corp., the world's biggest rail supplier, and other companies in China's government-run train industry. Backed by government financing, CRRC and other Chinese rail suppliers have been making deep inroads into markets around the world formerly dominated by Siemens and Alstom.

The Siemens partnership with Alstom followed months of discussions with Canada's Bombardier Inc. The talks with Bombardier slowed down midsummer when Siemens turned to Alstom for an alternative alliance, one person familiar with the discussions said.

Bombardier resumed talks with Siemens in recent weeks, and the two sides were continuing to talk Thursday night, the person said.

Alstom has faltered in recent years, forcing the French state to prop it up repeatedly. In 2003, the government announced an aid package worth more than EUR3 billion that saved the company from bankruptcy. Last year, the government said it would buy high-speed trains made at Alstom's Belfort factory to prevent it from closing after more than a century.

The companies said the combined group would be able to achieve cost savings of up to EUR470 million within four years of closing, which was expected to occur at the end of 2018. The lion's share of the savings would come from sharing the costs of R&D into digital technology, as well as services in manufacturing and operation of trains.